Review of the Banking Sector (September 21)

Update 300: Review of the Banking Sector; the Irony of Records Being Set Amid Deregulation

Today we go back to basics with a quarterly review of the health of the financial sector and the disparate sub-sectors comprising it. Industry has fostered misrepresentations of the state of the sector claiming to be hamstrung by regulation and suffering consolidation. Its reason is because Dodd-Frank is working all too well and yet still beset by Too Big To Fail because it isn’t working.   

In fact, never have revenues been higher, margins bigger, market caps bigger, salaries and bonuses bigger… and competition keener.  We’ll take the issue up again on October 2 when Senate Banking holds a hearing on the “Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act,” where the panel will re-examine whether bank deregulation makes sense given the current cyclical condition of the sector.  

Good reading and good weekends all…

Best,

Dana

——————————————————-

The Banking Sector’s Big Boom

  • Credit Unions

Prior to the passage of S.2155, credit unions were profiting significantly through market consolidation as they continued to gain more market share in areas underserved by community banks. In fact, they have increased their overall market share from around 6 percent at the start of the financial crisis to 7.4 percent in 2017. In other words, credit unions were doing better than ever and were not in need of further deregulation. Despite this, credit unions claimed a large victory in the deregulatory policies of S.2155, the Economic Growth, Regulatory Relief and Consumer Protection Act. Credit unions, along with community banks, received some deregulatory benefits in the bill, but the lion’s share of the benefits in S.2155 still went to the Wall Street elite firms.

  • Community Banks

Since the financial crisis, the condition of community banks has improved considerably. Community banks range from institutions with less than $1 billion in aggregate assets up to institutions with under $10 billion.  One of S.2155’s most notable changes raised the total asset threshold for submission to annual Federal Reserve stress testing from $50 billion to $250 billion, ostensibly not affecting community banks. This increased threshold does give more leeway to small banks looking to grow their asset size, because banks would have to hold over $250 billion in assets before being subjected to enhanced prudential standards.  However, the Fed could use its discretion to apply these standards to banks with between $100 and $250 billion in assets.

  • Midsize Regional Banks

Ten years out from the financial crisis, midsize regional banks also continue to improve.  Some of these banks, buoyed by the 2017 tax law, higher interest rates, and rising commercial bank loans, have almost doubled in size since 1Q 2017. Midsize regional banks gained the most by far from S.2155. Loosening regulatory scrutiny, including automatic enhanced prudential standards, on banks with assets up to $250 billion, hugely benefited the 24 mid-sized regional banks. These banks include household names like PNC, Capital One, SunTrust, and BB&T — not small, community-oriented banks. Rather, precisely these kinds of banks — institutions on their way to becoming banking giants and providing services and loans to the average American — need federal oversight.

  • Wall Street Elite Firms

In the years since the financial crisis, the nation’s elite banks have grown exponentially. The top 15 largest banks, including the likes of J.P. Morgan, Morgan Stanley, and Goldman Sachs, now hold a combined total of over $13 trillion in assets. The top six banks have also experienced record profit growth in recent years, seeing double-digit increases in just the last year from 2Q 2017 to 2Q 2018.

Source: Wall Street Journal

Republicans in Congress, and some Democrats, are deregulating under the guise of helping the little guys — community banks and credit unions — while many of the benefits are actually going to the top 100 financial institutions. Big banks continue to push for deregulatory measures, all the while continuing to benefit from the windfalls of S.2155 and the Tax Cuts and Jobs Act (TCJA).

Underfunded, Understaffed, Undermined

While financial institutions are basking in the golden age of banking, federal agencies are under attack. Crucial regulatory and oversight agencies are undergoing severe budget and staffing cuts, and the Trump Administration and the GOP Congress remain hellbent on weakening protections under DFA.

  • FSOC/Fed: Last week, the Financial Stability Oversight Council (FSOC) used its discretion to remove the systemically important financial institution (SIFI) status of Zions Bank, which was the first time that FSOC has used its powers to de-designate a bank’s systemic risk label. It may be a sign of things to come, as the Fed now has the discretion to apply whatever prudential standards it deems necessary to banks under the new $250 billion threshold. During the same meeting last week, FSOC also reviewed insurance giant Prudential’s status as the one remaining non-bank SIFI. The council did not reach a decision, but the consensus among experts close to the matter is that Prudential’s status as a nonbank SIFI is in jeopardy. Ten years after the financial crisis and the dramatic collapse of American International Group (AIG), FSOC is on the verge of rendering one of the key DFA protections defunct. 
  • OFR: The research arm of FSOC, the Office of Financial Research (OFR), which is charged with seeking out problems in the financial system and raising them with regulators, is being decimated under the current administration. In January, the administration signaled that it was looking to cut OFR’s budget by 25 percent, to around $76 million; in August this year, around 40 staff members were laid off, as the agency’s headcount target is down 65 percent from its peak. The current nominee to head the office, Jeb Hensarling’s chief economist Dino Falaschetti, is a curious choice given Hensarling’s complete disdain for the agency and its mission. 
  • OCC/FDIC: In April of this year, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve issued a joint notice of proposed rulemaking (NPR) to make changes to the Enhanced Supplementary Leverage Capital Ratio (eSLR). This change would reduce capital requirements for the eight global-systemically important banks (G-SIBs) at their insured depository institutions by $121 billion, equivalent to a 20 percent reduction in capital. Current FDIC Chair Martin Gruenberg and two former FDIC chairs, Sheila Bair and Thomas Hoenig, have all spoken out against the NPR, arguing that the proposed changes are unnecessary and threaten financial stability.

Banks Turn to Lobbying

In an attempt to strengthen their image and weaken regulation, banks have turned more aggressively towards lobbying efforts.  Formed from a recent merger, the Bank Policy Institute (BPI) represents over 48 of the largest banks of the United States, whose combined lending accounts for 72 percent of all loans issued in the country. It is staffed by analysts, researchers, and attorneys, and is overseen by a Board of Directors consisting of some the largest names in the banking sector including the CEOs of Bank of America, Citigroup, and JP Morgan Chase.

BPI’s agenda is unsurprisingly aimed at further deregulation of the banking industry in an attempt to whittle down the regulatory regime that was established after the 2008 financial crisis. The Institute announced this week that it was hiring two top lobbyists to push for its legislative agenda. Some of their goals include lowering reserve requirement ratios and repealing self-funding requirements on lending.

Was S.2155 Worth It?

The aforementioned issues will come to a head on October 2, during the upcoming Senate Banking Committee hearing on the implementation of S.2155. There, we are likely to get a fair hearing on why risky deregulation should go forward when the sector is so flush. Fortunately for supporters of S.2155, costs of regulation are examined much more closely than costs of deregulation, a long-standing norm that makes it easier to deregulate and harder to regulate.  The SBC hearing in October will offer an excellent, hopefully balanced, picture of the benefits and the costs of S.2155, as well as a key platform for exploring the irony of deregulating this flush, prosperous, growing, systemically significant sector.

44 thoughts on “Review of the Banking Sector (September 21)”

  1. Whats up this is kinda of off topic but I was wanting to know if blogs use WYSIWYG editors or if you have to manually code with
    HTML. I’m starting a blog soon but have no coding skills so I wanted to get guidance from someone with experience.

    Any help would be greatly appreciated! asmr 0mniartist

  2. Hi there, I discovered your web site by way of Google while looking for a comparable topic, your site came up, it seems to be good.
    I have bookmarked it in my google bookmarks.
    Hi there, just become aware of your blog through Google, and
    located that it is really informative. I am going to be
    careful for brussels. I’ll appreciate should you proceed this in future.
    A lot of other folks shall be benefited from your writing.
    Cheers! asmr 0mniartist

  3. I’m not sure where you’re getting your info, but great topic.
    I needs to spend some time learning much more or
    understanding more. Thanks for wonderful information I was looking for
    this information for my mission. 0mniartist asmr

  4. Wow, superb weblog structure! How long have you ever been running a blog for?

    you make running a blog look easy. The whole look of your site is magnificent,
    let alone the content material!
    0mniartist asmr

  5. I blog quite often and I really appreciate your information.
    The article has truly peaked my interest. I am going
    to book mark your blog and keep checking for new information about once a week.
    I opted in for your Feed as well.

  6. Hi to all, how is everything, I think every one is getting more from this website, and your views are fastidious in favor of new people.

  7. Just wish to say your article is as surprising. The clearness in your
    post is just nice and i could assume you’re an expert on this subject.
    Well with your permission let me to grab your feed to keep up to date with
    forthcoming post. Thanks a million and please carry on the gratifying
    work.

  8. I all the time used to read article in news papers but now as I am a user of net so from now I am using net for posts, thanks to
    web.

  9. Fantastic post but I was wondering if you could write a litte more on this subject?

    I’d be very grateful if you could elaborate a little bit further.
    Appreciate it!

  10. Superb blog you have here but I was curious if you knew of any discussion boards that cover the same topics discussed here?
    I’d really love to be a part of community where I
    can get opinions from other experienced people that share the same interest.
    If you have any suggestions, please let me know. Thank you!

  11. My brother suggested I would possibly like this website.
    He was entirely right. This post actually made my day.

    You can not imagine simply how a lot time I had spent for this info!

    Thank you!

  12. scoliosis
    Hi everyone, it’s my first visit at this web page, and article is genuinely fruitful for me, keep up posting these content.
    scoliosis

  13. scoliosis
    Asking questions are really fastidious thing if you are
    not understanding something entirely, however this article offers
    pleasant understanding even. scoliosis

  14. free dating sites
    Thank you a lot for sharing this with all people you actually
    know what you’re talking approximately! Bookmarked.
    Kindly also talk over with my web site =). We can have a hyperlink alternate contract between us free dating sites

  15. I don’t know if it’s just me or if perhaps everyone else encountering problems with your website.
    It appears as though some of the written text within your content are running off the screen.
    Can someone else please comment and let me know if this is happening to them as well?
    This might be a problem with my internet browser because I’ve had this happen before.
    Many thanks

  16. This is very interesting, You’re a very skilled blogger. I’ve
    joined your rss feed and look forward to seeking more
    of your wonderful post. Also, I have shared your web site in my social networks!

  17. Having read this I believed it was rather enlightening.
    I appreciate you finding the time and energy to put this article together.
    I once again find myself spending a lot of time both reading
    and leaving comments. But so what, it was still worthwhile!

  18. We stumbled over here different web page and
    thought I might check things out. I like what I see so now i
    am following you. Look forward to looking into your web page yet
    again.

  19. I absolutely love your blog and find many of your post’s to be precisely
    what I’m looking for. can you offer guest writers to write content in your case?
    I wouldn’t mind publishing a post or elaborating on many of the subjects
    you write with regards to here. Again, awesome
    blog!

  20. I do not even know how I ended up here, but I thought this post
    was great. I do not know who you are but certainly you’re going to a famous blogger if you are not already 😉 Cheers!

  21. Have you ever thought about adding a little bit more than just your
    articles? I mean, what you say is valuable and everything.
    But imagine if you added some great images or video clips
    to give your posts more, “pop”! Your content is
    excellent but with pics and videos, this website could definitely be one of the greatest in its
    niche. Awesome blog!

  22. You actually make it seem so easy with your presentation but
    I find this topic to be actually something that I think I would
    never understand. It seems too complicated
    and extremely broad for me. I am looking forward for your next post, I’ll try to get the hang of it!

Leave a Comment

Your email address will not be published. Required fields are marked *